NEW YORK (Reuters) - The vice chairman of the Bitcoin Foundation, a trade group promoting the adoption of the digital currency, has been charged by U.S. prosecutors with conspiring to commit money laundering by helping to funnel cash to illicit online drugs bazaar Silk Road.

Charlie Shrem, who had financial backing from the Winklevoss twins and is well known as one of the bitcoin's biggest global promoters, was arrested on Sunday at John. F. Kennedy International Airport in New York, the U.S. Attorney's Office in Manhattan said on Monday.

Shrem, who was also charged with operating an unlicensed money transmitting business, appeared in U.S. District Court in Manhattan on Monday and was released on $1 million bond.

"At this point the allegations in the complaint are simply allegations, and Mr. Shrem is presumed innocent," his lawyer Keith Miller said.

The 24-year-old entrepreneur, who lives above a bar he jointly owns in Manhattan that accepts bitcoins as payment, was CEO of BitInstant, a bitcoin exchange company that closed last summer. According to prosecutors, Shrem conspired with a Florida resident, Robert Faiella, who ran an illegal exchange, to sell more than $1 million in bitcoins to users of Silk Road, which was shuttered by authorities last year.

Faiella, 52, is also charged in the complaint filed in U.S. District Court in Manhattan with conspiring to commit money laundering and operating an unlicensed money transmitting business. He was arrested at his home in Coral Gables, Florida. At his court hearing on Monday in federal court in Florida, Faiella consented to detention until Wednesday, at which point there will be a bail hearing.

Shrem could not be reached for comment. A person who answered the phone at Faiella's house and declined to be identified said, "Nobody wants to talk."

Bitcoin is a digital currency that is not backed by a government or central bank and whose value fluctuates according to demand by users. Users can transfer bitcoins to each other over the Internet and store the currency in digital "wallets."

The criminal complaint says that Shrem, in addition to knowing that Faiella's business was funneling money into Silk Road, also used Silk Road himself to buy drugs, including marijuana-infused brownies.

"When Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act," Preet Bharara, the U.S. attorney for Manhattan, said in a statement emailed to the press on Monday. "We will aggressively pursue those who would co-opt new forms of currency for illicit purposes."

Bharara has said recently that prosecutors are not going after Bitcoin itself and view it as they view any other currency in which transactions are sometimes made illegally.

U.S. law enforcement officials have vowed to pursue any criminal activity in the nascent Bitcoin world as regulators try to formulate their approach to the digital currency.

The charging of a prominent Bitcoin Foundation official may be a blow to Bitcoin's prospects, though it did not have a huge immediate impact on trading. Bitcoins were exchanging hands at $970 late on Monday, down from prices above $1,000 earlier this month but up from around $150 four months ago on the Tokyo-based exchange MtGox.

Winklevoss Capital, which is run by twin brothers Cameron and Tyler Winklevoss, invested in BitInstant in 2012 and led a capital-raising effort last May that raised $1.5 million. The twins, who are best known for their failed lawsuit against Facebook founder Mark Zuckerberg in which they had claimed he had stolen their idea for an online social networking platform at Harvard, have been seeking regulatory approval for a bitcoin exchange-traded fund.

"When we invested in BitInstant in the fall of 2012, its management made a commitment to us that they would abide by all applicable laws - including money laundering laws - and we expected nothing less," the Winkelvoss twins said in a statement. "Although BitInstant is not named in today's indictment of Charlie Shrem, we are obviously deeply concerned about his arrest," they said. "We were passive investors in BitInstant and will do everything we can to help law enforcement officials."

As part of the conditions of his bail, Shrem will be confined to his parents' home in the Marine Park section of Brooklyn. A report prepared by the court for his bail hearing listed his net worth at $6 million, according to U.S. Magistrate Judge Henry Pitman. Serrin Turner, an assistant U.S. attorney, opposed bail, saying Shrem had a "strong incentive to flee" and the means to do so.

Bitcoin insiders said Shrem's arrest showed just how hard it is to get away with illegal activity using Bitcoin, which has an ownership chain built into its software so that each unit can be tied to the users who have acquired or spent it.

"Using bitcoin for illicit transactions is really, really dumb," said Patrick Murck, the Bitcoin Foundation's general counsel. "Bitcoins are so easy to track."

"THE ART OF HIDING"

According to the charges, Faiella, going by "BTCKing" online, sold bitcoins to Silk Road users and passed on purchase orders he received from the site to Shrem, who filled them, transferring funds to Faiella's account at an unidentified bitcoin exchange service based in Japan.

The charging document says that Shrem failed to report suspicious activity to regulators "with respect to numerous Bitcoin purchases" Faiella made from BitInstant.

The document contains email conversations between Shrem and BitInstant's co-founder, who is not identified in the charges but is listed on BitInstant's website as Gareth Nelson, in which Shrem tried to hide his dealings with Faiella by pretending to ban him from BitInstant's exchange platform.

"You are hereby banned from our services," he wrote in an email to BTCKing that he copied to Nelson.

According to the complaint, Shrem then privately wrote to BTCKing, without including Nelson. "Your email address is banned," Shrem wrote, "but you can use a different one."

Bitcoins have been gaining wider acceptance recently. The Sacramento Kings basketball team earlier this month became the first professional sports franchise to say it would allow purchases using bitcoins. Last month, ecommerce site Overstock.com announced its plan to become the first major U.S. retailer to accept the digital currency.

Created in 2009 by a developer or team of developers going by the name Satoshi Nakamoto, whose true identity remains unknown, the bitcoin's earliest adopters have included people expressing a desire to conduct their affairs in a realm outside of government-sanctioned commercial spaces.

Some of that sentiment is visible in the charges against Shrem and Faiella. In one online interaction, Shrem tried to assure Faiella he was being discreet.

"The art of hiding is making people think you are someone else," he wrote. Faiella replied: "You must understand that the people that we pay taxes to have a long reach and I like to stay away from that."

(Reporting by Emily Flitter in New York; Additional reporting by Nate Raymond in New York and Brett Wolf in St. Louis; Editing by Leslie Adler)